A spike in the U.S. Dollar against a basket of major currencies is helping to put pressure on gold futures early Tuesday. The drop in gold since last Friday’s high has nearly erased all of the gains attributed to dovish comments from New York Federal Reserve President John Williams on July 18. This suggests that some speculative buyers may have been caught in a bull trap last week, which means we could see some heavy selling pressure if they are forced out of unfavorable positions.
At 09:25 GMT, August Comex gold futures are trading $1418.90, down $8.00 or -0.56%. The market is also going through its “rollover” into the next popular December Comex gold futures contract.
The U.S. Dollar is strengthening against all major components of the “basket” including the Euro, British Pound, Japanese Yen, Canadian Dollar and Swiss Franc.
The Euro, which is trading at its lowest level since June 3, is having the biggest impact on the dollar index. The selling is being fueled by speculators betting on one or several dovish moves by the European Central Bank at its policy meeting on July 25. The ECB can lower rates by at least 10-basis points, announce some form of quantitative easing or both at this meeting, or announce these move are coming in September.
The prime minister election in the UK has British Pound investors on edge, leading to today’s selling pressure. Investors are worried Boris Johnson the front-runner to become the UK’s prime minister, would trigger a “hard Brexit” from the European Union, widely seen as a major risk for the British economy.
Britain’s Conservative Party will announce the results of a leadership election on Tuesday, with Johnson widely expected to win, setting him up to become prime minister on Wednesday.
Additionally, according to the Commodity Futures Trading Commission, hedge funds have increased short positions on the pound to a 10-month high in the week to July 16.
The intraday trend in gold is down and likely to remain under pressure if the U.S. Dollar and Treasury yields continue to rise. Additionally, increased demand for risky assets will also weigh on gold prices.
However, the dovish moves by the European Central Bank and the election of Boris Johnson as the UK’s prime minister have been highly anticipated, which makes both the Euro and British Pound, ripe for a “sell the rumor, buy the fact” move.
A reversal to the upside in the Euro and British Pound would send the U.S. Dollar Index lower, which could help drive up demand for the dollar-denominated gold futures contract.
This article was originally posted on FX Empire
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